Market Watch

Alan Brugler is the President of Brugler Marketing & Management, and the primary analyst and advisor.

Meltdown

Oct 01, 2010

Market Watch and Tech Talk

October 1, 2010

Meltdown

As we said last week, forget the midweek action. Lately we’ve been seeing big volume and volatile trading on Friday’s. This week, it was a massive rush for the exits, with fund liquidation selling across a wide variety of commodity markets. The dollar index, which has been supportive for commodities, was still weak but it didn’t matter. As it was the first day of the new calendar quarter, the sell off can’t be dismissed as random. Somebody decided it was time to take some money out of their commodity investments, probably to put it back into equities.

Soybeans were more than 50 cents per bushel lower at one point on Friday, and settled 69 cents lower for the week. That was a 6.13% drop. Speculative liquidation was a major feature, with weakness in the products spiraling into the beans and vice versa. Chinese traders are on yet another government mandated week long holiday. Futures at Dalian won’t resume trading until October 7. A Memphis consulting firm put their crop projection at 3.42 billion bushels on a 44.7 bpa predicted U.S. average yield. USDA will release its updated estimate on Friday. The USDA soybean ending stocks were not a surprise, at 151 million bushels. Export sales continue to be excellent, with the weekly total at 1,737,600 MTs.

Corn was limit down on Friday. USDA provided the fuel for the initial break on Thursday, hiking old crop ending stocks by 322 million bushels from their September WASDE estimate in the September 30 Grain Stocks report. This is the final old crop number, and results in 322 million bushels being rolled forward into new crop as additional beginning stocks. Weekly export sales were also disappointing, showing the effects of price rationing. For the week, prices were down a whopping 10.73%, winning the dubious prize for the worst performing ag commodity this week. A Memphis firm is predicting that USDA will cut the national average yield to 160.3 bushels on Friday. In the bearish environment we had on Friday that drop was seen as bearish because it resulted in a crop size projection that still had a “13” in front of it.

Wheat was in hot pursuit of corn as it ran down hill. Chicago futures were down 9.03% for the week. MPLS and KC were comparatively stronger with losses of 7.4% and 8.94% respectively. The futures rally failed to reach the August high, and failed to close chart gaps under that high. Technically, this is a failure and an invitation to try the short side. Fundamentally, USDA cut the 2010 U.S. wheat production estimate from the prior number, but showed larger than expected September 1 stocks of 2.458 billion bushels. That is the largest pile of wheat for that date since the mid-1980’s and the CCC loan and Reserve programs.

Cotton futures posted 15 year highs on front month contracts during the week, and then sold off sharply. They were down 133 points for the week, which is pretty remarkable when there were two days with losses of more than 400 points included in that week. Weekly Export Sales were stronger than expected by the trade, fueling a Thursday rally. USDA computed the average world price for cotton at 95.77 cents per pound. Because of that, a special cotton import quota (shipments INTO the U.S.) was once again opened under the Farm Bill provisions, for 69,377 bales.

Hogs were down $2.65 this week, a loss of 3.35%. Pork cutout values dropped, and cash hogs were right with them. Pork bellies reported under the voluntary system dropped $15.69/cwt. for the week. Carcass value was down 3.19% for the week on a Friday/Friday basis as the other cuts were not able to offset that lower reported bacon value. Pork production for the year to date is down 4.7%. Production for the week ending October 1 was 6.9% smaller than the same week in 2009, which in principle should be supportive to cutout values. Demand of course, is the other variable besides supply.

Below is a table showing the net weekly changes and 4 week history of selected agricultural futures:

Commodity

Weekly

Weekly

Month

09/10/10

09/17/10

09/24/10

10/01/10

Change

% Change

Dec

Corn

$4.78

$5.13

$5.22

$4.66

0.56

10.73%

Dec

CBOT Wheat

$7.37

$7.39

$7.20

$6.55

0.65

9.03%

Dec

KCBT Wheat

$7.59

$7.68

$7.58

$6.90

0.68

8.94%

Dec

MGEX Wheat

$7.57

$7.73

$7.63

$7.06

0.57

7.41%

Nov

Soybeans

$10.31

$10.69

$11.26

$10.57

0.69

6.13%

Oct

Soybean Meal

$291.25

$304.70

$313.20

$285.70

27.50

8.78%

Oct

Soybean Oil

$41.36

$41.91

$44.48

$43.49

0.99

2.23%

Oct

Live Cattle

$97.15

$99.40

$96.02

$95.95

0.07

0.07%

Oct

Feeder Cattle

$111.83

$111.85

$109.50

$111.80

2.30

2.10%

Oct

Lean Hogs

$77.25

$77.70

$79.02

$76.37

2.65

3.35%

Oct

Cotton

$90.87

$97.61

$101.30

$99.97

1.33

1.31%

Dec

Oats

$3.24

$3.56

$3.52

$3.33

0.19

5.33%

Nov

Rice

$11.79

$12.08

$12.36

$12.37

0.01

0.08%

Cattle futures were pressured by sliding wholesale beef demand. The cutout was down $3.24/hundred in the Choice on a Friday/Friday basis. Estimated beef production for the week was down 0.9%. Production is down 0.3% for the year to date, a very modest drop. With beef exports up and imports down, the supply available to the consumer is a little tighter than the production number would indicate. Estimated carcass weight is running about 20# per head lower than last year, but appears to be creeping up with milder fall weather. The large drop in feed costs this week should also eventually result in a little heavier cattle if it is a trend reversal and not just a corrective washout.

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Market Watch: The cattle market will start the week adjusting to any surprise positions inherited when the October options expired on Friday. Grain traders will be focused on the weekly crop condition ratings, since USDA will be out on Friday with its updated yield forecast as of October 1. The main grain reports for the week are on October 8, with USDA Crop Production and updated WASDE supply/demand estimates. While USDA” inkled” some of the numbers via the Grain Stocks and Small Grains reports, the yield and even the acreage estimates are up for grabs. Expect more volatility. October cotton futures will expire on Thursday, but that should be pretty much a non-issue because the open interest migrated to the December some time ago.

There is a risk of loss in futures and options trading. Such trading is not appropriate for all individuals. Past performance is not necessarily indicative of future results. Comments made in this article are in no way to be seen as an endorsement of futures and options trading. Reproduction or rebroadcast of any portion of this article without written consent of Brugler Marketing & Management LLC is strictly prohibited. Call 402-697-3623 for information on our individualized subscription and consulting services.